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Author: 


Hicks,  Frederick  Charles 


Title: 


Competitive  and 
monopoly  price 

Place: 

Cincinnati 

Date: 

[1911] 


^mmmrnmn^-^^ 


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lin 


Hicks,  Frederick  Charles,  1863- 

...  Competitive  and  monopoly  price;  a  criticism  of  cur- 
rent theory  with  special  reference  to  its  bearing  upon  the 
trust  problem,  by  Frederick  Charles  Hicks  ...  Cincin- 
nati, 0.,  University  press  [^1911] 

39  p.  25*".  (University  of  Cincinnati  studies.  iSer.  ii,  voL  vii,  no. 
2i)        9^:^ 


1.  Prices.    2.  Trusts,  Industrial. 
Library  6f  Congress 


Copyright    A  303728 


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University  of  Cincinnati 

Studies 


Seria*  II 


MARCH-APRIL,  1911 


VoL  VII.  No.  2 


Competitive  and  Monopoly 

Price 


\ 


BY 

FREDERICK  CHARLES  HICKS 

UNIVERSITY  OF  CINCINNATI 


PUBLISHED  B¥  THE  UNIVEBSITY  OP  CINCINNATI 
CINCINNATI,  OHIO 


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School  of  Business 


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University  of  Cincinnati  Studies 


Competitive  and  Monopoly  Price 

A  criticism  of  current  theory  with 
special  reference  to  its  bear- 
ing upon  the  trust  problem 


FREDERICK  CHARLES  HICKS 

University  of  Cincinnati 


Issued  Bi-monthly,  from  the 

University  Press,  Cincinnati,  Ohio 


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CONTENTS 


I.  The  Basis  of  the  Present  Trust  Policy,  - 
II.  The  Current  Theory  OF  Price,     - 
III.  How  Prices  are  Determined,    -       -       - 

IV.   A  Trust  Policy  Fair  to  Big  Business  and 
TO  the  Consumer, 


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Competitive  and  Monopoly  Price 


THE  BASIS  OF  THE  PRESENT  TRUST 

POLICY 

The  present  trust  policy  of  the  United  States  is  an 
attempt  to  destroy  monopoly  and  thereby  leave  the  field 
rcompetitive  industry.  This  policy  finds  expression 
in  the  anti-trust  laws  of  the  United  States  and  of  he 
several  States;  in  their  judicial  interpretation;  m  the 
demand  that  these  laws  be  more  rigorously  enforced; 
and  in  various  proposals  to  amend  the  laws  so  as  the  more 
surely  to  accomplish  their  purpose,  wherever  m  their 
present  form  they  are  inadequate  to  the  annihilation  of 

monopoly.  ..r    .i,- 

Many  illustrations  might  be  given  to  exemphfy  this 

policy.    One  will,  however,  suffice  for  the  present  pur- 
pose    The  Anti-Trust  law  of  the  United  States  declares 

*^* ''  "Every  contract,  combination  in  the  form  of 
trust  or  otherwise,  or  conspiracy,  m  restraint  of 
trade  or  commerce  among  the  severa  states 
or  with  foreign  nations,  is  hereby  declared  to 

^  "Every  person  who  shall  monopolize,  or  at- 
tempt to  monopolize,  or  combine  or  conspire 

5 


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.',11,. 


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COMPETITIVE  AND  MONOPOLY  PRICE 

with  any  other  person  or  persons  to  monopolize, 
any  part  of  the  trade  or  commerce  among  the 
several  states,  or  with  foreign  nations,  shall  be 
deemed  guilty  of  a  misdemeanor,    .     . 


"1 


This  law  has  been  the  subject  of  numerous  court 
decisions,  including  several  by  the  Supreme  Court  of 
the  United  States.  Among  the  most  important  cases 
to  reach  this  high  tribunal  was  the  one  known  as  the 
Northern  Securities  case,  which  was  decided  in  1903. 
The  opinion,  affirming  the  decree  of  the  circuit  court 
against  the  Northern  Securities  Company,  was  prepared 
by  the  late  Mr.  Justice  Harlan.  In  this  opinion,  after 
extended  reference  to  previous  decisions  of  the  Court, 
several  propositions  were  stated  as  deducible  from  those 
decisions.    Among  these  propositions  are  the  following: 

"That  Congress  has  the  power  to  establish 
rules  by  which  interstate  and  international  com- 
merce shall  be  governed,  and,  by  the  Anti-Trust 
Act,  has  prescribed  the  rule  of  free  competition 
among  those  engaged  in  such  commerce." 

"That  the  natural  effect  of  competition  is 
to  increase  commerce,  and  an  agreement  whose 
direct  effect  is  to  prevent  this  play  of  compe- 
tition restrains  instead  of  promotes  trade  and 

commerce." 

"That  to  vitiate  a  combination,  such  as  the 
act  of  Congress  condemns,  it  need  not  be  shown 
that  the  combination,  in  fact,  results  or  will  re- 
sult in  a  total  suppression  of  trade  or  in  a 
complete  monopoly,  but  it  is  only  essential  to 
show  that  by  its  necessary  operation,  it  tends 
to  restrain  interstate  or  international  trade  or 
commerce  or  tends  to  create  a  monopoly  in  such 
trade  or  commerce  and  to  deprive  the  public  of 
the  advantages  that  flow  from  free  competi- 
tion,"^ 


N, 


i 


1  a6  Stat,  at  Large.  209,  chap.  647,  U.  S.  Comp.  Stat.  1901.  p.  3200. 
t  U.  S.  Rcporta.  193.  pages  331.  332.    Not  itaUcized  in  the  original. 


THE  BASIS  Ot  THE  PRESENT  TRUST  POLICY  7 

Throughout   the   opinion,   numerous   references   are 
made  to  the  "natural  laws  of  competition,"  to  the  ad- 
vantages arising  therefrom,  and  to  the  purpose  of  the 
Act  to  secure  the  operation  of  those  laws.    Subsequent 
decisions  containing  further  interpretations  of  the  Act 
have  not  modified  this   fundamental   attitude  towards 
competition    and    monopoly.      The    so-called    "rule    of 
reason,"  recently  applied  to  the  enforcement  of  the  law, 
has  gone  no  further  than  to  recognize  that  not  all  sup- 
pression of  competition  is  necessarily  in  restraint  of 
trade.     The  intent  of  the  law  remains,  as  before,  to 
prevent  monopoly  and  to  secure  free  competition. 

Moreover,  in  this  intent,  the  Anti-Trust  law  voices 
correctly  public  opinion.  Although  there  is  widespread 
dissatisfaction  with  the  results  that  have  been  attained 
under  it,  popular  confidence  in  its  fundamental  purpose 
continues  undiminished. 

An  explanation  of  this  general  attitude  condemning 
monopoly  and  approving  competition  is  to  be  found  in 
an  intuitive  belief  in  the  doctrine  of  "fair  price." 

The  idea  that  some  prices  are  fair  and  others  unfair 
is  practically  universal.    This  idea  has  existed  for  cen- 
turies, perhaps  as  long  as  buying  and  selling  themselves 
have  existed.    During  the  Middle  Ages  it  was  known  as 
the  doctrine  of  "just  price,"  an  admirable  description  of 
which  is  found  in  Professor  W.  J.  Ashley's  "English 
Economic  History."     At  that  time  it  was  taught  that 
"in  any  particular  country  or  district  there  is  for  every 
article,  at  any  particular  time,  some  one  just  price:  that 
prices,'  accordingly,   should  not  vary  with  momentary 
supply  and  demand,  with  individual  caprice,  or  skill  in 
the  chaffering  of  the  market.    It  is  the  moral  duty  of 
buyer  and  seller  to  try  to  arrive,  as  nearly  as  possible, 
at  this  just  price."'    Moreover,  "as  experience  showed 

S  Vol.  I.  p.  146. 


I 


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8 


COMPETITIVE  AND  MONOPOLY  PRICE 


that  individuals  could  not  be  trusted  thus  to  admit  the 
real  value  of  things,  it  followed  that  it  was  the  duty 
of  the  proper  authorities  of  State,  town,  or  guild  to  step 
in  and  determine  what  the  just  and  reasonable  price 
really  was."* 

The  application  of  such  a  principle  to  actual  business 
transactions  necessitated  a  standard  by  which  to  deter- 
mine whether  the  prices  at  which  commodities  and  serv- 
ices were  offered  for  sale  were  just  or  unjust.  Such 
a  standard  was  found  for  the  producer  of  that  time, 
not  in  "what  would  enable  him  to  make  a  gain,"  but 
in  "what  would  permit  him  to  live  a  decent  life  accord- 
ing to  the  standard  of  comfort  which  public  opinion 
recognized  as  appropriate  to  his  class."**  Moreover, 
it  may  be  noted  in  passing,  this  standard  was  not  ill- 
adapted  to  the  conditions  then  prevailing,  when  business 
intercourse  was  on  a  small  scale,  the  market  for  most 
articles  was  a  limited  one,  and  the  consumer  and  pro- 
ducer as  a  rule  dealt  directly  with  each  other. 

With  the  passing  of  years,  new  industrial  conditions 
developed  to  which  old  ideas  and  old  policies  were  no 
longer  suited.  But  there  remained  and  still  remains  the 
basic  idea  of  fair  price.  There  has  come,  however,  a 
new  standard  by  which  to  determine  fairness  and  a  new 
view  as  to  the  proper  method  for  securing  fairness. 

It  is,  perhaps,  too  much  to  affirm  that  the  present 
standard  of  fair  price  has  been  definitely  fonnulated. 
Nor  it  is  intended  here  to  enter  upon  a  full  discus- 
sion of  this  subject;  though,  in  view  of  the  controversy 
over  "earned"  and  "unearned"  increments  and  of  the 
increasing  tendency  to  call  in  the  aid  of  public  authority 
to  secure  reasonable  charges,  there  is  developing  an  urg- 
ent need  for  a  thorough  analysis  of  the  basis  of  fairness 
with  a  view  to  arriving  at  a  reasonable  standard. 


» 


4  IbU.  140. 


5  Ibid.  138. 


THE  BASIS  OF  THE  PRESENT  TRUST  POLICY  9 

In  general,  it  is  probably  correct  to  say  that  in  the 
efforts  to  prevent  unfair  prices  at  the  present  time,  the 
test  applied  is  gain  or,  as  it  is  commonly  called,  profits. 
A  fair  price  is  one  which  yields  fair  profits.  Just  what 
are  fair  profits  in  any  particular  case  is  not  easy  to  de- 
termine, but  it  is  certain  that  the  concept  of  fair  profits 
as  a  test  of  fair  prices  does  not  mean  a  definite,  uni- 
versally  applicable  per  cent  of  some  arbitrarily  selected 
base.  Fair  profits  mean  a  fair  return  for  those  engaged 
in  business,  due  account  being  taken  of  the  character 
of  the  business,  the  capital  required,  the  risks  involved, 
and  the  ability  demanded  of  those  who  become  responsible 
for  the  initiation  and  conduct  of  business. 

The  absence  of  a  definitely  formulated  standard  for 
determining  fairness  is  not  a  mere  accident.  It  is  due 
to  the  prevailing  view  as  to  the  method  by  which  fair- 
ness is  to  be  secured— a  method  under  which  the  ques- 
tion of  what  is  fair  may  be  left  to  take  care  of  itself ; 
for  fairness,  it  is  believed,  will  follow  as  a  matter  of 
course  from  the  method  of  securing  it.  That  method 
is  free  competition.  Whereas,  formerly  public  authority 
exercised  directly  upon  price  was  relied  upon  to  msure 
justice,  to-day  the  same  end  is  sought  by  procuring  the 
unimpeded  operation  of  competition. 

True,  it  has  come  to  be  recognized  that  there  is  a 
field  of  activity  in  which  competition  is  not  effective. 
Such  for  example,  is  the  case  with  telephone,  lighting, 
and  other  similar  industries.  Here  Government  regula- 
tion is  acccepted  as  essential.  But  so  far  as  the  broad 
field  of  general  industry  is  concerned,  public  opinion  still 
holds  to  the  idea  that  free  competition  is  society's  safe- 
guard against  injustice,  and  that  public  authority  is 
needed  here,  if  at  all,  only  to  assist  in  securing  free 
competition.  Competitive  price  is  fair ;  monopoly  price 
is  unfair. 


^1 


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mmimim 


lO 


COMPETITIVE  AND  MONOPOLY  PRICE 


To  this  view,  entertained  by  society  in  general,  ex- 
emplified by  the  anti-trust  laws  above  mentioned,  econo- 
mists lend  the  weight  of  their  authority.  It  must  suffice 
for  the  present  discussion  to  cite  but  one  example  of 
the  teaching  of  current  economics,  but  it  is  a  typical 
one,  taken  from  the  latest  edition  of  the  "Outlines  of 
Economics,"  by  Professor  Richard  T.  Ely  and  collabo- 
rators. Speaking  of  prices  under  competition,  it  is  said 
that  "if  we  include  the  value  of  the  business  man's 
services  among  the  expenses  of  production,"  "the  prices 
received  for  the  products  of  any  particular  business" 
tend  to  equal  "the  expenses  of  producing  them."® 

Later,  in  discussing  just  price,  it  is  said : 

"The  competitive  system  is  to-day  so  thoroughly 
accepted  as  the  'natural'  economic  order,  that 
there  is,  as  we  have  previously  noted,  a  deep- 
seated  conviction  that  normal  competitive  prices 
(measured  by  the  expenses  of  production)  are 
natural  and  just  prices."^  This  conviction  is, 
however,  brought  face  to  face  with  the  fact  of 
the  growth  of  a  large  industrial  field  in  which 
monopoly,  rather  than  competition,  rules.  The 
question  of  just  price  is  again  a  live  issue — as 
it  was  before  the  growth  of  the  competitive 
system.  Public  authority  is  frequently  invoked 
to  insure  that  the  prices  fixed  by  holders  of 
municipal  franches  and  other  monopolists  are 
just  and  reasonable.  The  chief  fundamental 
test  which  our  courts  are  able  to  apply  to  the 
reasonableness  of  any  particular  price  is  its  con- 
formity to  what  the  price  would  have  been  under 
competitive  conditions  J  Thus  it  is  often  asked 
if  a  particular  monopoly  charge  gives  a  more 
than  normal  return  upon  the  capital  invested. 
The  determination  of  what  the  expense  of  pro- 
ducing a  particular  commodity  or  service  really 
is,  is  often  a  difficult,  or  even  impossible,  task 


f  1     ♦ 


•  p.171. 


7  Not  italicized  in  the  original. 


I 


THE  BASIS  O?  THE  PRESENT  TRUST  POLICY  II 

(the  distinction  between  constant  and  variable 
expenses  being  frequently  a  stumb  ing-block ) , 
but,  given  the  general  acceptance  of  the  competi- 
tive system,  it  is  hard  to  see  what  other  standard 
could  be  used."* 

Few  if  any,  are  satisfied  with  the  results  of  our 
present 'anti-trust  policy.  Some  are  calling  for  more 
stringent  enforcement  of  existing  laws ;  others  for  amend- 
ments to  those  laws  which  shall  remove  all  possible 
avenues  of  escape,  especially  those  believed  to  be  af- 
forded by  the  latest  Supreme  Court  decisions;  while 
still  others  are  asking  for  such  a  modification  of  our 
anti-trust  policy  as  shall  permit  a  distinction  between 

good  and  bad  trusts. 

What,  meanwhile,  is  to  be  said  of  the  current  eco- 
nomic doctrine  of  competitive  and  monopoly  price,— a 
doctrine  which  is  at  the  root  of  the  whole  matter? 

8  ««  tRo  i8i     In  an  earUer  part  of  the  treatise  (p.  iS9)  the  reader  is  warned 
the  price  would  have  been  under  competitive  conditions. 


V 


^ 


•^'1'mn'mmmimtf 


THE  CURRENT  THEORY  OF  PRICE 

As  it  is  the  purpose  of  this  paper  to  analyze  the  cur- 
rent theory  of  price  with  a  view  to  judging  its  validity, 
it  is  necessary  to  state  in  this  connection  just  what  this 
theory  is;  though,  as  the  subject  is  fully  set  forth  in 
numerous  available  treatises  on  economics,  only  its  salient 
features  need  be  described  here.^ 

Current  theory  recognizes  two  sorts  of  price,  desig- 
nated respectively  competitive  price  and  monopoly  price. 
Corresponding  to  these  are  two  classes  of  business,  com- 
petitive industries  and  monopolies. 

Competitive  price  exists  when  competition  is  free, 
and  it  equals  cost  of  production.  By  cost  of  produc- 
tion is  meant  the  actual  expense  of  producing  plus  what 
may  be  called  normal  profits.  To  avoid  misunderstand- 
ing, this  may  be  called  social  cost  of  production.  To 
the  individual,  cost  of  production  means  of  course  the 
amount  which  he  must  pay  for  raw  materials,  wages, 
interest  on  capital,  and  such  other  outlays  as  are  incident 
to  the  production  and  sale  of  goods.     These  expenses 


1  The  illustrations  of  current  theory  in  the  following  description  are  taken  from 
the  Outlinet  of  Eeonomk$,  by  Richard  T.  Ely,  revised  and  enlarged  by  the 
author  and  Thomas  S.  Adams,  Max  O.  Lorenz  and  Allyn  A.  Young,  published  by 
The  Macmillan  Company,  New  York,  1909.  Essentially  similar  illustrations  are 
afforded  by  all  standard  treatises  on  Economics.  See,  for  example,  Seligman'a 
PrineipUt  cif  Eemomict,  Part  III,  Book  I.  Value :  General  Principles  ;  and  Seager's 
IntrodvetUm  to  Economicf,  Chap.  V,  Value  and  Price,  and  Chap.  XI,  Distribution  : 
Monopoly  Profits. 

IS 


THE  CURRENT  THEORY  OF  PRICE 


IJ 


are  deducted  from  the  amount  received  from  sales,  and 
the  difference  constitutes  his  profits.  But,  viewed  from 
the  standpoint  of  the  consumer,  profits  are  the  payment 
for  the  services  of  the  one  who  provides  the  business 
ability  without  which  commodities  can  no  more  be  pro- 
duced than  without  labor,  for  which  wages  are  paid. 
From  the  standpoint  of  society,  then,  it  is  proper  to 
include  at  least  normal  profits  as  a  part  of  cost  of  pro- 
duction. 

Just  what  normal  profits  are,  as  was  pointed  out 
above,^'  can  not  be  stated  precisely  as  a  certain  per- 
cent or  as  a  fixed  amount.  Yet  that  such  a  thing 
as  normal  profits  exists  as  a  feature  of  current  thought, 
is  evidenced  by  the  not  infrequent  reference  to  profits 
in  some  transactions  as  abnormal.  Normal  profits  will 
of  course  vary  with  the  quality  of  business  ability  re- 
quired in  various  undertakings,  the  risk  involved,  and 
other  attending  conditions,— in  brief,  with  the  character 
of  the  business.  A  sufficiently  accurate  description  of 
normal  profits  is  afforded  by  the  statement  that  profits 
may  be  considered  normal  in  any  industry  when  they 
afford  no  special  or  extra  inducement  to  enter  the  busi- 
ness or  to  leave  it. 

Competitive  price,  then,  tends  to  equal  social  cost  of 

production. 

"If  it  were  always  an  easy  matter  for  busi- 
ness men  to  change  their  interests  and  their 
energies  from  one  line  of  production  to  another, 
and  if  capital  and  labor  could  likewise  be  freely 
transferred  from  one  undertaking  to  another,  it 
is  hard  to  see  how  profits  in  any  one  competitive 
business  could  be  for  any  length  of  time  much 
higher  than  in  other  competitive  businesses. 
Managerial  ability,  labor,  and  capital  would 
gravitate    always    toward    those    employments 

2  p.  9. 


1 


'     It 


H 


iM 


» 


■'I 


i 


14  COMPETITIVE  AND  MONOPOLY  PRICE 

which  promised  the  greatest  profits.  The  effect 
would  be  a  continual  tendency  toward  equality 
of  advantage  in  different  lines  of  business.  This 
does  not  mean  necessarily  an  equality  of  profits 
as  between  individuals  in  any  given  lines  of 
business,  for  the  amount  of  profits  depends 
largely  upon  the  skill  and  enterprise  of  the  in- 
dividual business  man.  .  .  .  Purely  com- 
petitive profits,  under  conditions  of  absolute 
^fluidity'  of  business  ability,  of  labor,  and  of 
capital,  would  thus  tend  to  adjust  themselves 
according  to  the  ability  of  the  individual  busi- 
ness man ;  .  .  .  If  we  include  the  value  of 
the  business  man's  services  among  the  expenses 
of  production,  we  may,  obviously,  state  the 
tendency  which  we  have  described  as  a  tendency 
toward  the  equality  of  the  prices  received  for 
the  products  of  any  particular  business  and  the 
expenses  of  producing  them."* 

The  proposition  that  price  equals  social  cost  of  pro- 
duction assumes  a  condition  of  free  competition,  and 
it  is  important  to  note  what  is  meant  by  such  a  condi- 
tion. From  the  above  description  of  the  nature  and 
tendency  of  competitive  price,  it  will  be  seen  that  com- 
petition is  considered  free  when  capital,  labor,  and 
business  ability  can  move  with  perfect  freedom  from 
one  industry  to  another.  This  is  often  called  a  condi- 
tion of  perfect  fluidity,  and  the  designation  is  a  fortunate 
one,  for  there  is  involved  an  analogy  to  the  tendency  of 
water  to  seek  the  same  level  in  several  different  recep- 
tacles which  are  so  connected  that  the  water  can  pass 
freely  from  one  to  another. 

It  would,  however,  be  a  mistake  to  suppose  that  those 
who  accept  the  doctrine  of  price  here  described  believe 
that  productive  agencies  are  or  ever  can  be  perfectly 
fluid  or  that  competition  is,  even  under  so-called  com- 
petitive conditions,  ever  absolutely  free.     On  the  con- 

•  Ely.  pp.  170, 171. 


»i  . 


a 


(•- 


THE  CURRENT  THEORY  O^  PRICE 


If 


trary,  it  is  recognized  that  co-operation  and  custom 
modify  the  working  of  competition,  while  at  times^  the 
state,  in  order  to  raise  the  plane  of  competition,  "sets 
limits  to  the  rivalry,"  which  is  the  essence  of  compe- 
tition, as,  for  example,  when  it  regulates  the  labor  of 
women  and  children,  requires  safety  appliances  and  sani- 
tary conditions,  limits  the  right  of  contract  in  the  case 
of  injury,  and  so  forth.* 

Nor  is  perfect  fluidity  necessary  to  the  existence  of 
competitive  price,  for  there  is  always  some  free  capital, 
free  labor,  and  free  business  ability  seeking  a  field  of 
operation,  and  at  the  same  time  the  capital,  labor,  and 
business  ability  now  employed  tend  to  wear  out  and 
disappear.  The  new  will  seek  the  fields  offering  highest 
returns,  while,  as  the  old  disappears,  it  will  not  be  re- 
newed in  those  industries  which  yield  less  than  normal 
returns. 

"Managerial  ability,  labor,  and  capital  are 
all  specialized  to  a  greater  or  less  extent,  so  that 
they  can  not  be  changed  from  one  employment 
to  another  without  loss  of  efficiency.    But  it  is 
not  necessary  for  the  validity  of  our  analysis 
that  all  managerial  ability,  all  labor,  and  all  cap- 
ital should  be  fluid  enough  to  change  from  m- 
dustry  to  industry   economically.     There  are 
always  a  certain  number  of  business  men  who 
are  anxiously  watching  for  the  most  inviting 
business  opportunities ;  there  is  always  a  certam 
amount  of  labor  awaiting  the  most  remunerative 
employment,    and   there   is    always   a   certain 
amount  of  money  awaiting  investment  in  those 
forms    of    capital    goods    which    produce   the 
greatest  value.    These  facts  are  enough  to  give 
substantial  truth  to  the  statement  that  in  any 
competitive  industry  the  price  of  the  commodity 
produced  tends  to  equal  the  cost  of  producmg 
it."»  


4  Ely.  p.  36,  d  atQ' 


*  Ely,  pp.  171. 17a. 


'"'ttI 


1* 


COMPETITIVE  AND  MONOPOLY  PRICE 


»tf/ 


11^ 


i 


111 :  I'  I 


i 


t 


In  sharp  contrast  to  competitive  price  is  monopoly 
price,  or  the  price  of  a  commodity  produced  under  con- 
ditions of  monopoly.  While  under  competition  price 
is  fixed  at  social  cost  of  production,  under  monopoly 
price  is  fixed  at  that  point  which  will  yield  the  largest 
net  returns.  As  has  been  seen,  social  cost  of  production 
means  cost  to  the  individual  producer  plus  a  normal 
profit  to  him.  So  by  way  of  emphasizing  the  contrast 
between  the  two  sorts  of  price,  it  may  be  said  that  com- 
petitive price  is  determined  by  normal  profits,  monopoly 
price  by  largest  profits. 

In  deciding  at  what  price  to  oflFer  his  goods  for  sale, 
the  monopolist  proceeds  upon  the  well-known  tend- 
ency for  sales  to  decrease  when  prices  increase  and 
for  sales  to  increase  when  prices  decrease.  Net  returns 
are  the  product  of  two  factors:  the  profit  on  a  unit  of 
sales,  such  as  a  bushel  of  wheat,  a  pair  of  shoes,  etc., 
and  the  number  of  units  sold.  When,  therefore,  a  monop- 
olist seeks  to  increase  his  total  profits  by  increasing 
the  price  of  his  commodity,  he  must  take  into  account 
the  fact  that  such  an  increase  in  price  may  be  expected 
to  result  in  a  decrease  in  sales,  and  this  in  the  ultimate 
outcome  may  result  in  decreasing  the  sum  total  of  his 
profits.  On  the  other  hand,  although  lowering  the  price 
of  his  commodity  will  probably  lead  to  larger  sales,  the 
increase  in  profits  that  might  be  expected  from  such 
increase  in  sales  may  be  more  than  offset  by  the  de- 
creased rate  of  profit  per  unit.  At  some  point  the  re- 
lation between  rate  of  profit  and  extent  of  sales  will 
be  such  as  to  yield  the  largest  total  profits,  and,  having 
a  monopoly,  he  will,  so  far  as  his  judgment  of  conditions 
enables  him  to  do  so,  fix  the  price  at  that  point. 

Such,  in  brief,  is  the  process  by  which  monopoly 
price  is  determined.    A  full  description  of  monopoly  price 


It 


».♦ 


THE  CURRENT  THEORY  OF  PRICE  »f 

would  necessitate  some  modification  of  this  statement. 
For  example,  there  may  be  more  than  one  price  that 
would  yield  the  same  maximum  of  net  returns.  But  the 
fundamental  principle  involved,  i.  e.,  that  monopoly  price 
is  determined  by  largest  profits,  would  still  be  valid. 

The  following  table,  taken  from  Professor  Ely's 
"Outlines  of  Economics,"^  will  illustrate  the  working  of 
these  principles : 


NVICBXB 

or  SAiAS 

TOTAL 
XABNIMQ8 

VARIABLE 

■xramns 

FBB    UNIT 

TOTAL 
YABUBLB 
KXFBN8ES 

nXBD 

vxraims 

TOTAL 
BXFBHBIS 

hr 

nuvM 

rn  UNIT 

BBVIMUB 

|o.io 

.09 
.08 
.07 
.06 
.05 
.04 

600,000 

800,000 

1,200,000 

i,8oo,uuo 

2,500,000 
3,500,000 
5,500,000 

$60,000 
72,000 
96,000 
126,000 
150,000 
175.000 
220,000 

IO.O3 
.03 
.03 
.03 
.03 
■03 
.03 

|i8,ooo 
24,000 
36,000 
54,000 
75.000 
100,000 
165,000 

$50,000 
50,000 
50,000 
50,000 
50,000 
50,000 
50,000 

$68,000 

74,000 

86,000 

104,000 

125,000 

i55»ooo 
215,000 

—$8,000 

2,000 

-f  10,000 
4-22,000 
-1-25,000 
+20,000 
+    5,000 

Commenting  upon  this  illustration,  the  author  says : 

"Study  of  the  table  will  show  why,  in  the 
case  assumed  here,  the  monopoly  price  will  stand 
at  six  cents.  Competition,  if  it  were  present, 
would  keep  on  increasing  the  supply  as  long  as 
normal  profit  could  be  obtained.  In  our  illus- 
tration the  lowest  price  at  which  production 
could  be  carried  on  so  as  just  to  secure  a  profit 
above  the  expenses  of  production  would  be  four 
cents;  and  four  cents  would  therefore  be  the 
competitive  price.     ...     But  since  the  mo- 


•  p- 199. 

This  table  does  not.  of  course,  attempt  to  show  just  what  rate  of  decrease  in 
number  of  sales  would  result  from  the  assumed  increase  in  price.  In  practice  the 
decrease  would  vary  with  different  commodities  and  with  the  same  commodity  at 
different  times.  Moreover,  in  actual  business  the  variable  expenses  per  unit  would 
not  be  constant,  as  it  frequentiy  happens  that  the  larger  the  amount  produced  the 
lees  the  expense  of  production  per  unit.  Neither  of  these  features  of  the  example . 
however  is  at  aU  inconsistent  with  the  principles  which  it  is  intended  to  illustrate 


1 


n 


III! 


l8  COMPETITIVE  AND  MONOPOI.Y  PRICE 

nopolist  has  such  control  over  the  production 
that  he  can  control  the  supply,  he  will  cut  off 
production  at  2,500,000  units,  at  which  point 
demand  will  fix  a  price  of  six  cents,  and  will 
give  the  largest  net  return,  viz.,  $25,000."^ 

The  term  "monopoly"  as  commonly  employed  often 
lacks  that  precision  of  definition  which  scientific  analysis 
would  require,  yet  its  meaning  is  fairly  clear.  It  is 
intended  to  designate  a  condition  in  which  those  who 
sell  have  such  control  over  the  supply  of  their  com- 
modities that  they  are  able  to  fix  the  prices  at  which 
the  commodities  are  sold.  As  stated  in  the  treatise  from 
which  the  above  illustration  is  taken: 

"Monopoly  means  that  substantial  unity  of 
action  on  the  part  of  one  or  more  persons  en- 
gaged in  some  kind  of  business  which  gives 
exclusive  control,  more  particularly,  although 
not  solely,  with  respect  to  price."® 

It  is  recognized  that  monopoly  is  not  always  com- 
plete and  absolute.  The  definition  refers  to  "a  perfect 
type  of  monopoly,"  whereas,  just  as  in  the  case  of  com- 
petitive price,  competition  may  not  be  perfectly  free,  so, 
in  the  case  of  monopoly  price,  monopoly  may  be  incom- 
plete. 

"We  have  a  partial  monopoly  where  there 
is  a  unified  control  over  a  considerable  portion 
of  the  industrial  field,  but  not  over  a  sufficient 
portion  to  give  complete  domination  of  the  whole 
field."' 

Nevertheless,  and  this  is  the  important  fact,  whether 
competition  is  free  or  limited,  and  monopoly  complete 
or  incomplete,  the  fields  of  competition  and  monopoly  are 
considered  to  be  distinct. 


7p.aoo. 


8  p.  xSS. 


9  p.  191  • 


5  I 


i 


THE  CURKENT  THEORY  OF  PRICE 


19 


"Our  conclusion,  then,  may  be  stated  as  fol- 
lows: There  is  a  great  and  growing  field  ot 
industry  in  which  competition  is  not  natural  or 
permanently  possible,  for  reasons  explamed  m 
the  text;  there  is  another  field  withm  which 
monopoly  does  not  and  can  not  exist. 
The  main  points  in  the  current  theory  of  price  may 

be  thus  summarized :  ■  •  j 

1  There  are  two  sorts  of  price,  competitive  and 
monopoly,  each  of  which  is  determined  in  accordance 
with  a  principle  peculiar  to  it  and  quite  unlike  that  m 
accordance  with  which  the  other  is  determined. 

2  The  essential  condition  of  competition  is  fluidity, 
i.  e.,  transferability,  of  capital,  labor,  and  business  ability 
from  one  industry  to  another. 

3  Price  under  competition  is  determined  by  social 
cost  of  production,  for,  on  the  one  hand,  if  price  nses 
above  this,  profits  will  rise  above  the  normal,  others 
will  be  attracted  into  the  industry,  production  wiU  be 
increased,  and  price  will  fall;  while,  on  the  other  hand, 
if  price  falls  below  social  cost,  profits  will  fall  below 
the  normal,  some  will  leave  the  industry,  production  will 
be  decreased,  and  price  will  rise. 

4  The  essential  condition  of  monopoly  is  such  unity 
of  action  on  the  part  of  sellers  as  gives  them  exclusive 

control  over  price.  ...       .         •  * 

5.  Price  under  monopoly  is  determined  by  the  point 
that  will  yield  the  largest  net  returns.  If,  on  the  one 
hand,  price  rises  above  this  point,  the  loss  from  the  re- 
sulting decrease  in  sales  will  more  than  offset  the  gam 
from  the  accompanying  increase  in  the  rate  of  profit; 
while,  on  the  other  hand,  if  price  falls  below  this  point, 
the  loss  from  the  resulting  decrease  in  the  rate  of  profit 
more  than  offsets  the  gain  from  the  accompanying  in- 
crease in  sales.    In  either  case  net  profits  are  reduced. 

10  Ely,  p.  196. 


f 


f 


I  HI 


COMPETITIVE  AND  MONOPOLY  PRICE 


The  practical  teaching  of  this  theory  of  price  is  ap- 
parent: Except  in  the  distinct  field  where  monopoly  is 
natural,  make  competition  free  and  there  will  follow 
normal  profits  and,  by  consequence,  fair  price.  Is  the 
theory  valid? 


I  > 


% 


W 


MM 


III 


HOW  PRICES  ARE  DETERMINED 

In  examining  the  current  theory  of  price  with  a  view 
to  determining  whether  its  explanation  is  correct  and 
satisfactory,  we  will  begin  with  an  analysis  and  com- 
parison of  the  influences  that  determine  competitive  price 
and  monopoly  price  respectively. 

It  will  be  observed  that  in  showing  that  competitive 
price  tends  to  equal  social  cost  of  production,  the  method 
employed  is  to  show  that  price  under  the  competitive 
conditions  assumed  will  not  permanently  remain  above 
or  below  social  cost.  In  like  manner,  the  method  em- 
ployed to  prove  that  monopoly  price  tends  to  the  point 
of  largest  returns  is  to  show  that  price  under  the  monop- 
olistic conditions  assumed  will  not  permanently  remain 
above  or  below  that  point.  It  will  facilitate  a  com- 
parison of  the  principles  according  to  which  each  of  these 
two  kinds  of  price  is  determined,  to  bring  together  for 
comparison,  first,  the  influences  which  prevent  each  from 
permanently  remaining  above  the  points  stated,  and  then 
the  influences  which  prevent  each  from  remaining  below 
the  respective  points. 

Turning,  first,  to  competitive  price,  it  may  be  asked : 
Why  does  competitive  price  not  rise  above  social  cost? 
The  many  forms  in  which  the  answer  to  this  query  might 
be  put  are  reducible  to  one,  viz.,  because  of  competition. 
Thus,  if  shoes  are  being  produced  under  so-called  com- 

21 


\ 


22 


COMPETITIVE  AND  MONOPOLY  PRICE 


HOW   PRICES  ARE  DETERMINED 


23 


petitive  conditions  and  $4  per  pair  yields  to  the  producer 
a  fair  profit,  the  price  of  these  shoes  can  not  permanently 
remain  above  $4.  For  a  time,  it  is  true,  before  condi- 
tions can  readjust  themselves,  a  seller  may  be  able  to 
get  $4.50  per  pair,  but  as  this  yields  more  than  a  normal 
profit,  others  will  be  drawn  to  the  shoe  industry  and 
competition  will  cause  the  price  to  fall  until  it  reaches  $4. 

On  the  other  hand,  to  the  question.  Why  does  mo- 
nopoly price  not  rise  higher  than  it  does?  the  answer 
given  is:  Because  if  it  did,  net  profits  would  be  less 
owing  to  a  falling  off  in  sales  for  which  the  increased 
rate  of  profit  per  unit  would  not  compensate.  Thus, 
if  for  any  reason  monopoly  should  come  to  exist  in  the 
production  of  shoes,  those  in  the  monopoly  would  no 
longer  be  deterred  from  raising  the  price  above  $4  per 
pair  by  fear  of  competition  with  other  shoe  manufac- 
turers. They  would,  therefore,  raise  the  price  until  the 
decrease  in  sales  would  lessen  net  profits. 

This  explanation  is  usually  considered  wholly  ade- 
quate to  account  for  the  limit  to  the  tendency  of  mo- 
nopoly price  upward.  It  is  undoubtedly  correct  as  far 
as  it  goes.  But  does  it  go  far  enough?  Does  this 
enable  us  to  compare  the  influence  that  keeps  monopoly 
price  from  going  higher  with  the  influence  that  keeps 
competitive  price  from  going  higher?  In  the  case  of 
the  sale  of  shoes  under  competition,  the  seller  can  not 
get  more  than  $4  per  pair  because  if  he  asks  $4.50,  the 
would-be  purchaser  will  go  to  another  dealer,  and  these 
two  sellers  of  shoes  are  said  to  be  competitors  because 
they  are  rivals  in  seeking  the  patronage  of  purchasers, 
each  trying  to  attract  customers  by  offering  a  better  in- 
ducement than  his  rival  in  the  shape  of  a  lower  price. 

When  it  is  said  that  monopoly  price  is  kept  from 
going  higher  because  of  the  loss  in  net  profits  that  would 


result  from  the  falling  off  in  sales,  it  becomes  important 
to  inquire  why  there  would  be  a  falling  off  in  sales. 
Why,  in  the  illustration  given^  of  the  method  of  deter- 
mining monopoly  price,  are  but  1,800,000  sold  yielding 
$126,000  when  the  price  is  7  cents,  while  2,500,000  are 
sold  for  $150,000  when  the  price  is  6  cents?  What 
becomes  of  the  $24,000  that  is  not  spent  for  this  com- 
modity, when  the  price  is  raised  to  7  cents?  To  these 
questions  the  manifest  answer  is:  When  the  price 
is  raised  from  6  to  7  cents,  purchasing  power  to  the 
extent  of  $24,000  is  diverted  into  other  channels.  It 
goes  for  the  purchase  of  other  commodities  which  are 
preferred  to  this  commodity  at  a  price  of  7  cents. 

This   fact   suggests   another  query:     What  relation 
do  the  sellers  of  the  other  commodities  sustain  to  those 
who  sell  the  commodity  assumed  in  the  illustration? 
Here,   again,   the   answer   is   clear:     They   are   rivals 
for  the  patronage  of  purchasers ;  that  is  to  say,  they  are 
competitors.    True,  competitors  are  often  spoken  of  as 
though  they  were  necessarily  rivals  in  the  same  business. 
A  moment's  consideration,   however,   should  suffice  to 
show  that  as  business  phenomena,  there  is  no  difference 
in  kind  between  the  rivalry  of  those  selling  the  same 
sort  of  goods  and  the  rivalry  of  those  selling  different 
sorts  of  goods,  so  long  as  the  rivalry  results  from  the 
fact  that  each  is  trying  to  offer  such  attractive  induce- 
ments as  to  lead  people  to  buy  his  wares  rather  than 
the  wares  of  the  same  or  different  sorts  offered  by  others. 
The  extent  and  force  of  competition  in  the  business 
world  are  but  faintly  appreciated  by  those  who  limit 
their  concept  of  competition  to  rivalry  between  those 
in  the  same  kind  of  business.    As  has  so  truly  been  said 
by  Professor  Ely : 

1  See  above  p.  17. 


^1^ 


)iSj 


< 


T 


^^mmm0»m 


I 


I 


.         1 


I; 


i  i 


34  COMPETITIVE  AND  MONOPOLY  PRICE 

"The  competition  of  the  market  embraces  not 
only  the  buying  and  selling  of  a  given  com- 
modity (like  wood),  but  also  the  buying  and 
selling  of  all  commodities.  In  this  sense  the 
wood  dealers  compete  with  the  grocers  and  the 
tailors,  as  well  as  with  coal  dealers  and  with 
each  other  "^ 

There  is  undoubtedly  a  difference  between  the  rivalry 
of  those  who  sell  like  commodities  and  the  rivalry  of 
those  who  seel  unlike  commodities.     But  this  difference 
does  not  lie  in  the  fact  that  one  is  competition  and  the 
other  is  not  competition.     Rivalry  between  those  who 
sell  like  commodities  is  probably,  as  a  rule,  more  intense 
than  that  between  sellers  of  unlike  commodities,  but  this 
is  a  difference  in  degree,  not  in  kind.    This  does  not  mean 
that  the  difference  is  unimportant.     The  very  fact  that 
in  some  instances  the  competition  that  exists  is  too  feeble 
to  stop  the  upward  tendency  in  price  at  the  point  which 
suffices  for  fair  profits,  may  justify  steps  to  supplement 
such  inadequate  competition.    But  the  fact  remains,  and 
its  ultimate  consequence  is  by  no  means  slight,  that  it 
is  competition  that  prevents  price  from  going  higher 
both  in  the  case  of  competitive  price  and  in  the  case  of 
monopoly  price.    In  the  ultimate  analysis,  the  statement 
that  monopoly  price  is  determined  by  the  point  that  will 
3rield  the  largest  net  returns  means  only,  so  far  as  the 
upward  tendency  of  monopoly  price  is  concerned,  that 
it  is  determined  by  the  point  which  under  the  existing 
condition  of  competition  will  yield  the  largest  net  re- 
turns.    And  it  is  equally  true  of  competitive  price  that 
it,  too,  is  determined  in  its  upward  tendency  by  the  point 
which  under  the  existing  condition  of  competition  will 
yield  the  largest  net  returns.     This  point  in  the  case 
of  monopoly  price  may  be  much  above  the  point  in  the 

>  OuMnti  0/  Ecmumiea,  p.  163.    Not  italicized  in  the  original. 


HOW  PRICES  ARE  DETERMINED 


25 


case  of  competitive  price;  but  this  is  not  due  to  the  fact 
that  different  kinds  of  influences  set  the  limits.  It  is 
due,  rather,  to  the  fact  that  competition  works  in  each 
of  the  two  cases  with  differing  effectiveness. 

Taking  up  next  the  influences  which  keep  competitive 
and  monopoly  price  from  going  below  certain  points,  it 
will  be  recalled  that  current  theory  teaches  that  competi- 
tive price  does  not  permanently  remain  below  social  cost 
of  production,  and  that  monopoly  price  is  maintained  up 
to  the  point  of  maximum  returns.  The  first  question 
to  be  considered  here  is:  Why  can  monopoly  price  be 
kept  up  to  the  point  specified?  Whatever  may  be  the 
forms  which  the  answers  to  this  query  take,  they  will 
amount  practically  to  this, — because  of  the  existence  of 
"substantial  unity  of  action  on  the  part  of"  the  person 
or  persons  engaged  in  the  business,  a  unity  of  action 
which  results  in  control  over  the  supply  of  that  which 
the  purchaser  seeks  to  obtain.  The  monopolist,  it  is 
said,  "freed  from  competition,  and  governed  only  by  de- 
mand, is  able  to  adjust  supply  to  demand  in  such  a  way 
that  the  price  will  stand  at  the  point  of  highest  net  re- 
turn."* 

On  the  other  hand,  when  competitive  price  is  under 
consideration,  the  reason  assigned  for  its  maintenance 
at  social  cost  of  production  is  that  if  price  falls  below 
this,  some  will  go  out  of  business,  production  will  be 
decreased,  and  price  will  go  up.  This  answer  is  not 
satisfactory  because  it  involves  the  implication  that  price 
has  within  itself  some  spontaneous  force  such  that,  once 
influences  holding  it  down  are  removed,  price  will  of  its 
own  accord  go  up.  Price  does  not  go  up ;  it  is  put  up. 
If,  in  the  case  of  the  shoes  mentioned  above,  competition 
among  the  sellers  results  in  the  price  being  reduced  to 

8  Ely,  p.  is>8. 


■!*''ii!PI iiiiiiii 


l^' 


26 


COMPETITIVE  AND  MONOPOLY  PRICE 


,1 


$3  a  pair, — $4  being  assumed  necessary  to  normal  profits, 
— it  may  be  expected  that  in  time  some  will  go  from  the 
manufacture  of  shoes  to  other  fields  where  at  least  normal 
profits  can  be  realized.  But  this  fact,  even  if  it  results 
in  the  manufacture  of  fewer  shoes,  is  not  sufficient  to 
account  for  the  restoration  of  the  price  of  shoes  to  its 
former  so-called  competitive  figure,  $4.  So  long  as  two 
producers  remain  in  the  field  and  continue  to  compete, 
price  will  continue  to  fall.  Nor  is  this  fact  controverted 
by  the  truth  that  producers  can  not  continue  indefinitely 
to  produce  at  a  loss.  The  significance  of  this  lies,  not 
in  controverting  the  proposition  that  if  producers  con- 
tinue to  compete,  price  will  continue  to  fall,  but  in  the 
fact  that  producers  can  not  continue  to  compete  indefi- 
nitely. 

Furthermore,  the  mere  cessation  of  competition  is  not 
of  itself  sufficient  to  explain  the  restoration  of  price  to 
$4,  which  may  be  called  its  normal  point,  and  this  for 
the  reason  just  given,  that  price  does  not  move  auto- 
matically. If  competition  drives  price  below  cost  of  pro- 
duction, price  will  move  up,  as  has  been  said,  only  when 
it  is  put  up,  and  it  will  be  put  up  only  when  there  is  such 
"substantial  unity  of  action"  among  those  remaining  in 
the  business  as  to  give  a  control  over  supply  sufficient 
at  least  to  enable  them  to  bring  the  price  back  again  to 
its  normal  point. 

It  is  important  to  distinguish  here  between  the  fact 
of  "substantial  unity  of  action  on  the  part  of  one  or  more 
persons  engaged  in"  a  business,  and  the  method  employed 
to  secure  such  unity  of  action, — a  distinction  fundamental 
to  this  analysis,  but  often  overlooked.  When  competi- 
tion drives  price  below  cost  of  production,  "unity  of 
action"  may  follow  merely  because  one  person  is  stronger 
than  his  competitors  and  is  thereby  enabled  to  hold  out 


HOW   PRICES  ARE  DETERMINED 


27 


until  they  are  driven  into  bankruptcy,  leaving  him  a 
free  field;  or  it  may  result  from  the  purchase  by  one 
of  the  interests  of  the  others;  or,  again,  it  may  arise 
from  an  agreement  between  the  competitors,— assuming 
the  absence  of  a  law  to  the  contrary,— by  which  they  con- 
tract not  only  to  suspend  competition,  but  also  to  unite 
in  raising  the  price ;  or,  finally,  the  substantial  unity  of 
action,  without  which  price  can  not  be  put  up,  may  come 
to  exist  without  bankruptcy,  purchase,  or  agreement,  but 
merely  as  the  result  of  an  independent  recognition  by 
each  that  he  is  a  loser  from  unreasonable  competition 
and  will  be  a  gainer  by  spontaneously  acting  in  union 
with  the  others.     The  permanence  and  efficiency  of  a 
unity  of  action  that  rests  merely  upon  such  a  spontaneous 
recognition  of  mutuality  of  interests  will  be  less  than 
when  that  unity  has  for  its  basis  an  agreement  or  the 
elimination  of  one's  competitors,  but  as  a  business  phe- 
nomenon, unity  of  action  is  unity  of  action  regardless  of 
how  it  is  brought  about  or  of  its  effectiveness.     More- 
over, it  is  this  unity  of  action  and  not  competition  which 
is  responsible  for  the  maintenance  of  price  up  to  social 
cost  when  it  is  so  maintained. 

One  other  explanation  of  the  return  of  competitive 
price  to  social  cost  calls  for  brief  attention  in  passing. 
Some  have  ascribed  this  to  competition  among  buyers. 
According  to  this  view,  competition  among  sellers  keeps 
price  down  to  social  cost  and  competition  among  buyers 
keeps  price  up  to  social  cost.  Such  a  method  of  reason- 
ing is  nothing  short  of  casuistical  jugglery,  worthy  alone 
of  the  modern  prestidigitator,  for  if  this  is  an  adequate 
explanation,  we  are  forced  to  the  conclusion  that  com- 
petition is  everything  and  explains  monopoly  price  as 
well  as  competitive  price.  The  necessity  of  such  a  con- 
clusion is  apparent.     If  the  return  of  price  to  social 


I 


w 


m  COMPETITIVE  AND  MONOPOLY  PRICE 

cost,  after  it  has  fallen  below  that  point,  is  to  be  ex- 
plained by  the  competition  among  buyers  which  arises 
when,  owing  to  the  low  price,  supply  is  decreased,  an 
analogous  and  equally  valid  explanation  is  to  be  found 
in  the  case  of  monopoly  price.     It  may  be  said  that 
monopoly  price  is  kept  up  to  its  high  point  by  the  com- 
petition among  buyers  which  arises  when  the  monopolist 
decreases  the  supply  which  he  offers  on  the  market.    Ac- 
cording to  this  method  of  analysis,  it  is,  then,  competi- 
tion among  buyers  that  keeps  both  competitive  price  up 
to  the  point  of  social  cost  and  monopoly  price  up  to  the 
point  of  largest  returns.     Add  this  to  the  fact  already 
shown,   viz.,  that   it  is  competition  which   keeps  com- 
petitive price  down  to  the  point  of  social  cost  and  mo- 
nopoly price  down  to  the  point  of  largest  returns,  and 
the  conclusion  follows,  as  was  said,  that  all  price,  mo- 
nopoly as  well  as  competitive,  is  determined  by  compe- 
tition. 

As  a  matter  of  fact,  in  so  far  as  competition  and 
unity  of  action  are  opposing  influences  in  their  effect 
on  price,  a  valid  analysis  of  price  must  begin  by  deter- 
mining whether  these  influences  are  to  be  viewed  as 
they  appear  in  the  acts  of  sellers  or  as  they  appear  in 
the  acts  of  buyers.  Whichever  standpoint  may  be 
adopted,  logical  consistency  requires  that  it  be  retained 
throughout  the  analysis.  In  the  present  case  competi- 
tion and  unity  of  action  are  viewed  as  the  acts  of  sellers, 
because  this  seems  the  most  common  way  of  looking  at 
them.  Such,  for  example,  is  the  case  when  competition 
is  regarded  as  the  safeguard  of  society  against  extor- 
tionate price  to  consumers.  The  competition  here  meant 
is  clearly  competition  among  sellers.  Similarly,  when 
monopoly  is  said  to  lead  to  exhorbitant  prices,  the  mo- 
nopoly thought  of  is  a  monopoly  on  the  part  of  sellers. 


HOW  PRICES  ARE  DETERMINED 


29 


) 


From  the  standpoint  of  the  sellers,  then,  it  is  sub- 
stantial unity  of  action  on  their  part  which  is  responsible 
for  keeping  price  up  to  social  cost,  when  it  is  so  kept  up. 
But,  as  was  seen,  it  is  also  substantial  unity  of  action 
which  enables  the  monopolist  to  keep  price  up  to  the 
point  of  highest  net  returns.     Moreover,  the  unity  of 
action  which  is  effective  in  the  case  of  competitive  price 
is  a  phenomenon  in  no  whit  different  in  kind  from  the 
unity  of  action  which  is  effective  in  the  case  of  monopoly 
price.    Such  difference  as  exists  is  wholly  one  of  degree. 
Lest  the  point  here  made  should  be  misinterpreted, 
it  may  be  permitted  to  repeat  what  was  said  in  a  similar 
connection  in  describing  the  relation  of  competition  to 
competitive  and  monopoly  price.    The  fact  that  it  is  the 
same  influence  which  keeps  both  competitive  price  and 
monopoly  price  from  going  lower,  the  difference  being 
one  of  degree,  not  of  kind,  does  not  warrant  the  con- 
clusion that  the  difference  is  unimportant.    Were  unity 
of  action  to  cease  from  further  influence  in  increasing 
price  when  it  sufficed  to  insure  the  producer  a  fair  re- 
turn, there  would  be  no  trust  problem.    It  is,  then,  pre- 
cisely because  unity  of  action,  which  is  necessary  and 
useful  to  a  degree,  may  and  does  go  beyond  the  point  of 
necessity   and   usefulness,   that  the  monopoly  problem 

exists. 

Nevertheless,  here  as  formerly  the  fact  remains  and 
is  of  practical  moment,  that  it  is  unity  of  action  on 
the  part  of  sellers,  involving  a  degree  of  control  over 
supply,  which  is  responsible  for  keeping  price  up,  both  in 
the  case  of  monopoly  price  and  in  the  case  of  competitive 
price.  Putting  this  conclusion  along  with  the  similar  one 
reached  from  an  analysis  of  the  reason  why  price  does 
not  go  higher,  it  will  be  seen  that  current  theory  errs 
in  two  important  respects :  neither  competitive  price  nor 


^ 


\ 


m 


30 


COMPETITIVE  AND  MONOPOLY  PRICE 


HOW  PRICES  ARE  DETERMINED 


31 


I,* 


monopoly  price  is  determined  by  one  influence  alone; 
nor  do  the  influences  which  determine  the  one  diflfer  in 
kmd  from  those  which  determine  the  other.  Both  are 
determined  by  the  combined  working  (i)  of  compe- 
tition and  (2)  of  unity  of  action.  When  the  former 
predominates,  price  falls ;  when  the  latter  predominates, 
price  rises;  the  actual  price  in  any  given  case  is  the 
resultant  of  the  two. 

Two  other  important  modifications  of  current  theory 
follow  as  corollaries  from  the  above  analysis.    First,  as 
to  the  concept  of  monopoly.     It  is  customary  to  define 
monopoly  as  such  unity  of  .action  as  gives  the  seller 
exclusive  control  over  price.*    It  is  to  be  assumed  that 
the  price  referred  to  here  is  the  price  at  which  com- 
modities are  actually  sold,  and  not  merely  the  price  at 
which  they  are  offered  for  sale.    But,  in  fact,  the  seller 
practically  never  has  such  exclusive  control  over  price; 
the  buyer  always  has  something  to  say  about  the  price 
at  which  a  thing  is  sold,  because  he  determines  whether 
he  will  accept  the  terms  offered  or  will  go  elsewhere, 
if  not  for  the  same  kind  of  commodity,  then  for  some 
other  commodity.    Competition  in  some  degree  is  present. 
This  does  not,  however,  dispose  of  the  monopoly 
question,  for  the  degree  of  control  exercised  by  sellers 
may  be  so  excessive  as  to  work  most  serious  injury. 
While,  however,  the  rejection,  as  unsound,  of  the  concept 
of  absolute  monopoly  does  not  dispose  of  the  monopoly 
problem,  it  does  have  a  most  important  bearing  upon  the 
direction  in  which  a  rational  solution  of  that  problem  is 
to  be  sought. 


*  A  frequent  cause  of  cotifusion  in  ditcuanons  of  monopoly  ia  found  in  the  fail- 
ure to  diatinguisli  between  "control  over  a  commodity"  and  "control  over  the 
price  at  which  a  commodity  is  sold."  As  was  seen  above  (p.  18),  Professor  Ely  re- 
gards control  over  price  as  the  distinguishing  characteristic  of  monopoly.  After 
fimnulating  his  definition  with  much  care,  he  says  "  Price  is  essential,  and  must  be 
regarded  as  the  fundamental  test  of  monopoly."    (hOine*  qf  Eeonomie*,  p.  188. 


/\ 


\ 


The  other  modification  of  current  theory  to  which 
reference  was  made  has  to  do  with  its  teaching  as  to 
the  condition  essential  to  the  existence  of  free  compe- 
tition.   As  was  seen,  it  is  usually  taken  for  granted  that 
perfect  fluidity  of  capital,  labor,  and  business  ability 
would  result  in  free  competition.    As  a  matter  of  fact, 
such  is  not  the  case.    What  would  result  if  there  were 
perfect  fluidity  is  that  competition  would  continue  until 
the  fair,  normal  profits  of  producers  were  threatened. 
At  this  point  competition  would  tend  to  cease  and  unity 
of  action  would  predominate  over  competition,  restoring 
profits  to  their  normal  amount,  and,  perhaps,  threaten- 
ing, in  turn,  to  make  profits  excessive,  in  which  case 
there  would  be  a  renewed  preponderance  of  competition. 
Current  theory,  then,  is  correct  in  teaching  that  under 
perfect  fluidity  of  capital,  labor,  and  business  ability, 
price  would  equal  social  cost  of  production,  but  it  errs 
in  assigning  as  the  reason  for  this  the  existence  of  free 
competition.     It  is  due,  rather,  to  the  fact  that  under 
such  perfect  fluidity,  the  relation  of  competition  and  of 
unity  of  action  would  involve  a  balance  at  the  point  of 
social  cost. 


.  J 


i 


k» 


n 


ll^ 


.ir>-i"'li 


•*-f /«W 


A  FAIR  TRUST  POLICY 


33 


.i) 


I.'; 

V 


' 


IV 

A  TRUST  POLICY  FAIR  TO  BIG  BUSINESS  AND 

TO  THE  CONSUMER 

This  analysis  of  price  and  of  the  nature  and  working 
of  the  influences  that  determine  price  has,  as  already 
stated,  some  important  bearings  on  the  trust  problem. 

In  the  first  place,  the  conclusions  reached  concerning 
price  show  that  the  proposition  that  all  contracts  and 
agreements  which  limit  competition  necessarily  restrain 
trade,  is  indefensible,  at  least  as  far  as  trade  in  the  long 
run  is  concerned.  For,  not  to  limit  competition  at  the 
point  where  its  further  action  will  result  in  loss  to  pro- 
ducers means  the  ultimate  bankruptcy  of  all  but  the 
strongest.  And  when  this  point  is  reached,  competition 
is  eliminated  and  trade  restrained  to  a  far  greater  degree 
than  when  there  are  several  producers  still  in  the  field, 
even  though  they  work  together  under  some  sort  of  an 
agreement. 

It  may  be  admitted  that  the  immediate  effect  of  lessen- 
ing competition  is  to  restrain  trade,  for  competition 
means  lowered  prices  and  lowered  prices  mean,  as  a  rule, 
larger  sales.  So,  even  the  competition  that  brings  actual 
loss  to  the  competitors  will  lead  to  larger  trade,  but  only 
temporarily.  When  such  competition  has  worked  out  its 
inevitable  result,  it  necessarily  eliminates  itself,  and  the 
result  is  loss  to  all.  It  is  a  truism,  that  the  interests 
of  the  consumer  quite  as  much  as  the  interests  of  the 

32 


\ 


producer  call  for  fair  profits  to  the  latter.  The  so-called 
"rule  of  reason"  as  applied  to  the  interpretation  of  the 
Anti-Trust  law  in  the  recent  decisions  of  the  Supreme 
Court  in  so  far  as  it  involves  the  principle  that  not  all 
acts  interfering  with  competition,  but  only  such  as  un- 
reasonably interfere  with  competition,  restrain  trade,  is 
unquestionably  sound.  It  is  by  no  means  improbable 
that  if  this  view  had  been  taken  in  the  early  interpreta- 
tions of  the  Anti-Trust  law,  industrial  consolidation 
would  have  developed  at  a  much  more  moderate  pace 
and  the  trust  problem  would  be  less  acute. 

A  second  point  suggested  by  the  analysis  of  price 
concerns  the   so-called   "natural   laws   of  competition," 
referred  to  in  the  Northern  Securities  case  and  not  in- 
frequently in  the  general  discussion  of  the  monopoly 
question.    What  are  these  "natural  laws  of  competition" 
whose  unimpeded  operation  conduces  to  public  advan- 
tage?   One  might  suppose,  from  the  common  use  of  the 
term,  that  there  are  certain  well-known  laws  of  compe- 
tition natural  to  industry  somewhat  as  there  is  a  law  of 
gravitation  natural  to  the  physical  world.     Especially  is 
such  an  assimiption  warranted  when,  without  stating 
these   natural   laws   of   competition,   they   are   referred 
to,  not  incidentally,  but  as  fundamental  to  the  interpreta- 
tion of  a  most  important  Federal  law  by  the  Supreme 
Court.    But  search  for  these  laws  is  vain.    No  treatise 
on  law  or  economics  supplies  them.     They  have  never 
been  formulated.    They  do  not  exist.     As  a  matter  of 
fact,  the  expression,  "natural  laws  of  competition,"  is  but 
a  method  of  referring  to  the  widespread  but  largely  un- 
analyzed  opinion  that  "competition  is  the  life  of  trade." 
Such  crude  concepts  will  no  more  suffice  as  the  basis  of 
a  policy  that  is  to  govern  the  business  of  to-day  than 
untested  steel  suffices  as  a  basis  of  the  vast  engineering 


i 


•]  < 


I 


ii 


'r 


i 


I 


»        ""iS^ 


i 


i  f 


34 


COMPETITIVE  AND  MONOPOLY  PRICE 


A  FAIR  TRUST  POUCY 


35 


If  If 
I 


[i 


II 


works  of  modern  industry.  When  subjected  to  analysis, 
as  has  been  shown,  the  natural  results  of  competition, 
if  left  to  itself,  are  its  own  destruction  and  public  injury. 

As  was  noted  at  the  outset,  the  present  trust  policy 
seeks  to  eliminate  certain  forms  of  industry  to  the  end 
that  the  field  may  be  left  to  free  competition,  in  the 
belief  that  free  competition  will  insure  fair  price.  Ref- 
erence has  also  been  made  to  the  fact  that  up  to  the 
present,  that  policy  has  failed  signally  to  accomplish  the 
results  expected.  The  measures  thus  far  adopted  have 
not  secured  the  unimpeded  working  of  competition. 
Not  that  these  efforts  have  been  wholly  fruitless,  but 
that  the  consensus  of  opinion  is  that  an  effective  solution 
of  the  trust  problem  has  not  yet  been  enacted  into  law. 

Various  reasons  for  this  failure  are  assigned  and  cor- 
respondingly various  remedies  are  proposed.  Their  de- 
tailed consideration  need  not  be  entered  upon  here.  The 
point  that  calls  for  emphasis  in  this  connection  is  that, 
if  the  above  criticism  of  the  current  views  of  price  is 
valid,  the  measures  already  adopted  were  foredoomed 
to  failure,  as  will  be  all  other  measures  which  rest  upon 
the  same  basis.  And  for  this  reason:  Granting  that 
social  cost  of  production,  i.  e.,  the  expense  of  production 
to  the  individual  plus  a  reasonable  profit,  is  the  correct 
standard  of  a  fair  price,  this  standard  can  not  be  reached 
through  competition  alone.  The  indispensable  requisite 
for  securing  a  fair  price  is  to  secure  the  proper  balancing 
of  competition  and  of  unity  of  action,  the  former  insur- 
ing fairness  to  the  consumer,  the  latter  insuring  fairness 
to  the  producer.  Whatever  may  be  the  details  of  the 
policy  when  they  are  worked  out,  this  is  its  starting  point, 
and  the  sooner  it  is  recognized,  the  sooner  may  we  expect 
to  discover  the  specific  measures  necessary  to  a  rational 
and  effective  policy. 


J 


Given  this  as  the  basic  consideration,  the  next  step 
will  be  to  determine  the  method  by  which  the  desired 
balance  of  competition  and  unity  of  action  can  be  se- 
cured. As  shown  above,  under  a  condition  of  perfect 
fluidity  of  capital,  labor,  and  business  ability,  the  balanc- 
ing of  these  two  opposing  influences  would  be  automatic. 
On  the  one  hand,  if  consumers  were  called  upon  to  pay 
too  much,  the  exceptional  profits  afforded  by  the  high 
price  would  attract  other  producers,  and  competition 
would  compel  a  lower  price;  on  the  other  hand,  if  pro- 
ducers failed  to  secure  a  fair  return  in  any  field,  such 
changes  among  producers  would  take  place  as  would 
result  in  the  unity  of  action  necessary  to  force  price  up 
to  the  point  of  fairness. 

But  capital,  labor,  and  business  ability  are  not  per- 
fectly fluid.  This  fact  is  recognized  in  the  current  theory 
of  price,  but  the  method  of  meeting  it  involves  a  serious 
omission  in  that  theory  and  a  fatal  flaw  in  the  policy 
based  upon  it.  It  will  be  recalled  that  according  to  this 
theory**  not  all  capital,  all  labor,  and  all  business  ability 
need  be  fluid  to  secure  fair  price.  The  existence  of  some 
free  capital,  some  free  labor,  and  some  free  business 
ability  seeking  a  field  for  operation  is  considered  suf- 
ficient. But  is  it?  To  what  extent  may  fairness  be 
expected  from  the  fluidity  of  that  portion  of  capital, 
labor,  and  business  ability  not  yet  employed  in  industry? 
Manifestly,  the  fairness  insured  by  this  is  fairness  to  the 
consumer  and  to  the  consumer  only.  It  is  the  prevention 
of  high  prices,  i.  e.,  the  conservation  of  the  interests  of 
the  purchasers  alone,  that  can  be  expected  from  this 
partial  fluidity.  What,  meanwhile,  of  fairness  to  the  pro- 
ducer? 

It  is  a  striking  and  an  important  feature  of  the 
present  industrial  policy  and  of  the  public  opinion  back 

A  See  above,  p.  15. 


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36 


COMPETITIVE  AND  MONOPOLY  PRICE 


of  it,  that  the  consumers'  interests  alone  are  thought 
to  demand  special  consideration.  It  seems  to  be  assumed 
that  the  producer  can  take  care  of  himself.  If  the  matter 
ever  enters  the  mind,  it  is  probably  dismissed  with  the 
thought :  What  need  of  protection  has  the  modern  trust 
whose  resources  are  to  be  reckoned  in  millions?  Whereas, 
the  very  magnitude  of  the  interests  at  stake  intensify  the 
necessity  of  adequate  means  for  their  safeguarding. 

Furthermore,  the  efforts  in  behalf  of  consumers  have 
often  led  to  measures  denying  to  producers  the  only 
means  by  which  they  can  defend  themselves,  viz.,  an 
effective  unity  of  action.  In  defense  of  such  a  policy 
may  be  urged  the  danger  of  the  abuse  of  the  power 
which  unity  of  action  gives,  if  it  is  permitted  to  exist. 
This  danger  is  a  very  real  one,  and  herein  lies  the  crux 
of  the  problem :  How  can  the  interests  of  the  consumers 
be  conserved  while  allowing  to  producers  the  unity  of 
action  which  is  indispensable  to  them  ?  On  the  one  hand 
is  the  trite  but  true  fact  that  unrestrained  freedom  to 
combine  is  intolerable.  But,  on  the  other  hand,  is  the 
equally  true  fact  which,  whether  trite  or  not,  can  not 
be  too  strongly  emphasized,  that  no  policy  looking  to 
fairness  can  be  expected  to  succeed  which  does  not  pro- 
vide fairness  for  the  producer  as  well  as  for  the  con- 
sumer. 

While  it  is  true  that  perfect  fluidity  of  industrial 
agencies  does  not  exist  and  has  never  existed,  this  fact 
has  not  always  been  as  serious  a  handicap  as  now,  to 
the  attainment  of  a  fair  price  through  the  spontaneous 
working  of  business  influences.  During  the  early  part 
of  the  nineteenth  century,  when  the  idea  was  taking 
shape  that  competition  is  adequate  to  the  regulation  of 
general  industry,  if  only  it  can  be  allowed  free  play, 
the  character  of  business  favored  the  so-called  ''let  alone" 


i 


A  FAIR  TRUST  POLICY 


37 


or  self-abnegation  policy.  Though  it  was  equally  true 
then  as  now  that  fair  price  is  the  result,  not  of  compe- 
tition alone,  but  of  competition  and  unity  of  action  co- 
operating, the  failure  to  recognize  this  fact  and  the  con- 
sequent glorification  of  competition  was  not  a  serious 
mater.  Among  the  features  of  the  industry  of  that  time 
which  favored  the  "let  alone"  policy  were  the  small 
size  of  business  units,  their  varied  character,  the  rela- 
tively small  part  played  by  capital  and  especially  by  fixed 
capital,  and  the  individual  or  partnership  form  of  or- 
ganization. 

When  industries  were  small  and  markets  correspond- 
ingly limited,  competition  among  producers  was  not  so 
intense  as  now.    Moreover,  there  was  frequently  a  per- 
sonal  relation  between  producer  and   consumer   which 
conduced  to  mutual  fairness.     The  impersonal  modem 
corporation  was  then  the  exception.    Again,  the  fact  that 
each  industry  as  a  rule  supplied  a  variety  of  products 
tended  to  soften  the  effect  of  an  excessive  competition 
in  the  case  of  some  articles,  as  the  seller  might  make 
up  for  unduly  low  profits  on  them  by  correspondingly 
high  profits  on  others.    The  relatively  small  part  played 
by  capital  signified  a  larger  fluidity  of  business  ability. 
Under  such  conditions  it  was  easier  for  one  to  leave  an 
unprofitable  field  and  betake  himself  to  a  profitable  one,— 
a  transfer  which  was  rendered  easier  then  than  now,  too, 
by  the  relatively  small  amount  of  fixed  capital  required 
in  industries.    In  short,  business  ability  and  capital,— and 
for  that  matter,  labor  also,  which  had  not  yet  become 
'  intensely  specialized,— were  highly  fluid,  and  even  where 
fluidity  was  lacking,  conditions  existed  which  tended  to 

prevent  unfairness. 

The  contrast  between  the  character  of  business  at 
the  beginning  of  the  nineteenth  century  and  its  present 


i 


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38 


COMPETITIVE  AND  MONOPOLY  PRICE 


character  is  marked.  Large  business  units,  immense  ag- 
gregations of  fixed  capital,  intense  specialization,  cor- 
porate organization,  a  world  market, — these  are  the  dom- 
inant features  of  modem  industry.  And  every  one  of 
these,  in  one  way  or  another,  militates  against  the  spon- 
taneous realization  of  a  healthy  adjustment  of  competition 
and  unity  of  action  through  fluidity  of  the  industrial 
agencies  or  through  the  influences  that  tend  to  make  up 
for  the  absence  of  fluidity.  The  belief  of  some  that  the 
advantages  of  big  business  can  be  secured  to  society 
without  allowing  them  the  unity  of  action  necessary  to 
their  healthy  conduct,  is  vain.  Equally  vain  is  the  belief 
that  the  public  can  without  serious  loss  return  to  the 
small  business  unit,  or  that  a  policy  suited  to  the  small 
unit  stage  of  production  is  applicable  to  the  large  unit 
stage. 

The  sum  of  it  all,  then,  seems  to  be  clear  in  principle, 
however  difficult  may  be  the  working  out  of  the  details. 

1.  Fair  price  can  be  secured  only  by  securing  the 
proper  balancing  of  competition  and  unity  of  action.  No 
policy  can  hope  for  success  which  regards  competition 
as  natural  and  beneficial  in  and  for  itself  and  unity  of 
action  as  abnormal  and  injurious. 

2.  Since,  under  modem  industry,  the  healthy  balanc- 
ing of  competition  and  unity  of  action  can  not  be  at- 
tained through  the  spontaneous  working  of  business  in- 
terests, there  must  be  legislation,  and  this  legislation 
must  have  for  its  object,  not  the  impossible  regime  of  free 
competition,  but  the  proper  adjustment  of  both  compe- 
tition and  unity  of  action. 

3.  Mere  general  provisions  as  to  acts  that  are  in 
restraint  of  trade  are  not  sufficient.  The  dividing  line 
between  acts  which  in  their  ultimate  effect  do  and  those 
which  do  not  restrain  trade  is  altogether  too  indefinite 


A  FAIR  TRUST  POLICY 


39 


to  suit  the  needs  of  business.  The  specific  evils  shown 
by  experience  to  result  from  excessive  unity  of  action  and 
from  excessive  competition  should  be  clearly  defined  and 
explicitly  forbidden,  so  that  both  the  general  public  and 
those  who  manage  industry  may  know  just  what  is  and 
what  is  not  contrary  to  law. 

A  final  word  may  be  added  concerning  two  criticisms 
that  will  doubtless  be  advanced  against  the  program  sug- 
gested. Some  will  say  that  it  tends  towards  socialism. 
In  reply  to  this,  it  may  be  urged,  and  urged  truthfully, 
that  the  real  promoters  of  socialism  are  those  who  per- 
sistently pursue  an  impossible  end  in  seeking  to  achieve 
fairness  by  the  aid  of  competition  alone.  They  succeed 
only  in  prolonging  and  intensifying  existing  evils. 

Others  will  claim  that  the  policy  as  proposed  is  im- 
possible of  realization.  To  this  it  must  suffice  here  to  say 
that  such  a  conclusion  is  not  warranted  until  the  policy 
has  been  given  a  fair  trial.  Moreover,  such  fair  trial 
can  not  be  had  until  public  opinion  ceases  to  deify  "free 
competition."  Nor  is  such  fair  trial  attainable  until  it 
is  recognized  that  there  are  good  as  well  as  bad  possi- 
bilities both  in  competition  and  in  that  unity  of  action 
which,  only  when  excessive,  produces  the  evils  of  mo- 
nopoly. 


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